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The common financial mistakes young people are making

There are a few common financial pitfalls young adults fall into once they're on their own.(Photo: Getty Images)

Millennials who are in their 20s and early 30s are finished with school and are starting out on their own. They have a long list of things that they want to accomplish, but patience is generally not part of the equation. As such, since patience and diligence is necessary when dealing with finances, young adults are setting a trap for themselves which could cause financial distress for many years to come. Here are some of the mistakes they make and methods to correct them.

Not paying off debt or paying off the wrong debt first. As a student, millennials had a delay in paying their student loans, parents may have helped with their credit card debt, and they managed to get by. Now that they have graduated, those loans become due and, for the independent adult, parental help is no longer an option. But not all debt is equal. Credit card debt and store debt may incur interest rates of 18-25%. Student loan debt may hover around 4%-8%. Yet millennials feel that the student loan should be tackled first. It is important to stay current on your payments, but they should work hard to pay off the high interest debt first.

Not sticking to a budget. The only way that a financially secure life can be established is to know how much money is coming into the household and where it goes. By creating a budget that they can live by, millennials can take control of their finances. This will allow them to limit unnecessary purchases and put more money into paying off their debt.

Giving up a low-rent apartment for a better living space. Although it is understandable that a newly employed millennial wants to live in a better environment, that new place comes at a price. It is even more financially unsound if they buy a house too soon. It is important to determine how the extra rent or mortgage payment will affect a limited budget. Some questions that should be asked before moving are whether that rent or mortgage can be maintained over the long term and what will happen to the ability to pay it if there is a sudden downturn in the economy. Moving to a better location is done only after other debt and expenses have been minimized.

Not saving for retirement. Although millennials have many working years ahead of them, time does fly. The earlier they start putting away money for retirement, the larger the amount will be at retirement. It is extremely difficult to play “catch up” after years of neglecting this part of their financial foundation. If an employer matches the employee’s contribution, then the young adult is missing a golden opportunity to double retirement dollars.

Not establishing an emergency fund. Young adults do not consider mortality, serious illness, or potential job loss. They are full of enthusiasm, energy, and a zest for life. Yet the unexpected does happen and, in an instant, a life can be turned upside down. The amount of money that is saved regularly is not as important as the consistency of doing it. The end result should be about three months’ salary. This money should be relatively liquid and easily drawn upon as needed. Over time it will build up and provide a safety net should the unfortunate happen. Being prepared for any eventuality is paramount to good financial footing.

Mary Fox Luquette, MBA, CLU, ChFC is a finance instructor in the B I Moody III College of Business at the University of Louisiana at Lafayette.

Mary Fox Luquette(Photo: Amy Windsor)

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